Models of Corporate Governance

Models of Corporate Governance
CCL 2012
Henrik Norinder
Models of Corp Governance
Consider how context and culture affect corporate governance
- American rule-based model
- United Kingdom/Commonwealth principles-based model
- Continental European two-tier model
- Japanese business network model
- Asian family based model
- corporate governance: convergence or differentiation?
- institutions necessary for successful corporate governance
Context and culture affect corporate
governance
Differences in ownership patterns
– highly dispersed with no dominant owner
– concentrated with single or block holders
dominant
Markets for corporate control
Culture influences on corporate governance
Markets for corporate control
In finance markets that are large, liquid, and
with high turnover listed companies face
– chances of hostile take-over bids
– consequential loss of board control
– widespread merger and acquisition activity
In finance markets that are small, illiquid with
low turnover, the market for corporate control
will be weaker, and merger and acquisition
activity infrequent
Five broad systems of corporate governance:
– the American rule-based mode
– the United Kingdom/Commonwealth principlesbased model
– the Continental European two-tier model,
– the Japanese stakeholder-orientated network
model
– the Asian family-based model
The American rule-based model
– companies incorporated by states
– Investor protection federal by SEC
– company law based on common law
– governance regulated by law and mandatory
rules, which are inherently inflexible
– high levels of litigation
– generally accepted accounting principles rulebased
– unitary boards with executive and non-executive
directors
– roles of board chairman and CEO often combined
The UK/Commonwealth principles-based model
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companies incorporated at country level
company law based on common law
governance principles-based
corporate governance codes - follow or explain why
not
– international accounting standards
– unitary boards with executive and non-executive
directors
– roles of board chairman and CEO separated
The Continental European two-tier model
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companies incorporated at country level
company law based on rule-based civil law
governance rooted in the law
international accounting standards
supervisory board - all non-executive
executive board - all executive
no common membership between the two boards
co-determination with employee and shareholder
appointed directors on supervisory board
The Japanese business network model
– Keiretsu networks of companies connected through cross-holdings,
interlocking directorships and extensive inter-trading
– classical model of the keiretsu reflects the social cohesion within
Japanese society
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unity throughout the organization
non-adversarial relationships
lifetime employment
enterprise unions
personnel policies encouraging commitment
decision-making by consensus
promotion based on loyalty and social compatibility as
well as performance
This model is currently under pressure to change but survives
The Japanese business network model
– boards of directors tend to be large
– all executive - the top layers of the management
pyramid
– 'promotion to the board‘
– independent outside directors not acceptable
• how can they understand the company?
• how can they appreciate the corporate culture?
• potential to disrupt the harmony
– Meetings of the whole board formal, ceremonial
– governance power lies with chairman and senior
directors/executives
The Asian family-based model
Overseas Chinese firms are:
– family centric with close family control
– controlled through an equity stake kept within the family
– entrepreneurial often with a dominant entrepreneur
– decision making centralised
– close personal links emphasizing trust and control
– paternalistic in management style
– social fabric dependent on relationships and social harmony,
– strategically intuitive with business seen as more of a succession of
contracts or ventures, rather than strategic plans, brand-creation or
quantitative analysis
Corporate governance – convergence or differentiation?
Forces for convergence
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CG codes of good practice around the world
securities regulators
international accounting standards
global concentration of audit practices
globalization of companies
raising capital on overseas exchanges
international institutional investors
private equity funding
cross-border merger of stock exchanges
research publications, conferences and professional journals
Corporate governance – convergence or differentiation?
Forces for differentiation
– legal differences in company law, contract law and
bankruptcy law
– different standards in legal processes
– stock market differences – capitalization, liquidity
– differences in the market for control
– differences in ownership structures
– historical differences and expectations
– cultural differences
Institutions necessary for successful CG
• a reliable legal system with an independent
judiciary
• courts that are bias and corruption free
• judgements that are enforceable, free of
political pressures
• a stock market with liquidity, international
standing financial institutions, regulatory
authorities including securities and futures
market regulators
• a companies registry that facilitates
comprehensive disclosure
• accounting and legal professions that are
internationally respected
• auditing firms that are professional, reliable, and
independent of their clients
• professional organizations educational
institutions with relevant qualifications
• consulting organizations able to advise
companies and directors
• financial and corporate governance training
• corporate governance research reported in
sound journals
We have considered:
- how context and culture affect corporate governance
- American rule-based model
- United Kingdom/Commonwealth principles-based
model
- Continental European two-tier model
- Japanese business network model
- Asian family based model
- corporate governance: convergence or differentiation?
- institutions necessary for successful corporate
governance